Improving the EDA Funding Environment

EDA startups are seeking nontraditional investors, such as foreign funds looking to enter the US technology sector.

For the record, I'm an EDA lifer. That may seem clever and even witty, but I consider my various experiences working with a variety of talented professionals on-the-job training that I wouldn't trade for anything. It's put me front and center at some of the most interesting business situations and technological breakthroughs you can imagine.

My experiences as a mergers and acquisitions professional at Cadence, as a startup CEO looking for funding, and now as an angel investor have led me to think a great deal about the electronic design automation investment climate. We've had to readjust our business models and get more creative on the funding side, yet I am optimistic about the industry's future.

As has been long reported and dissected, the traditional venture capital route is closed today to early-stage EDA startups and emerging companies. This is especially confusing because several funds claim to invest in infrastructure companies but won't touch the EDA sector. I reconfirmed this recently while checking on an investment opportunity that previously would have had VCs lining up to fund the company with customer endorsements, production-worthy products, and credible technologists. Here are the answers I got from four different VCs, all of whom have EDA investments or had them in the recent past.

"This is likely not a fit for my fund -- EDA is likely not a growth area."

"Unfortunately, I will pass on the opportunity. We have struggled with the market size of EDA in the past."

"Unfortunately, this is not a focus area for us at this time, due to the industry structure."

"I will check it out and get back to you. I must forewarn you that we are negatively predisposed to semi deals."

Every EDA entrepreneur approaches the same few angel investors, most of whom were successful EDA entrepreneurs at one time. Most of these investors are approachable, and many are willing to invest in a seed round of funding. However, angels have limited resources and are not a substitute for VC funds.

A strategy touted by industry analysts for many years recommends that a collection of private EDA companies merge. The newly formed company would be a viable initial public offering candidate and a potential acquirer of startups. Unfortunately, that has never become reality for a variety of reasons, ranging from valuations to the selection of executive management. Another route that seems to have contracted significantly is investments by large EDA vendors in promising startups.

Now that we have the negatives out of the way, let's look at the alternatives and the reasons to be more optimistic. First, the goal of the founding team should always be to build the company on a small amount of money to limit dilution.

The Jumpstart Our Business Startups (JOBS) Act is intended to make it easier for small companies to go public in the US by easing some securities regulations. It also enables crowdfunding in all kinds of industries. You can bet some savvy entrepreneur is developing an EDA crowdfunding site.

EDA startups are seeking nontraditional funding sources, such as foreign funds looking to enter the US technology sector. For example, Breker Verification Systems, where I am a board member, recently raised $5 million from a Far East fund looking to diversify into the Silicon Valley technology industry.

Some companies have taken funding from customers and industrial partners through an equity investment or early purchase/co-development format. That's what Cadence did in its formative years with various customers. On a smaller scale, when I was CEO of Certess, we benefitted from an early investment from STMicroelectronics, which was instrumental in helping us raise additional funding. In these two cases, it worked well for both parties, and the customer got early access to new software. This is an important funding avenue for EDA startups, because semiconductor companies are craving innovative technology.

From my perspective, the way to expand the industry and reclaim fund managers' interest is to expand the industry to adjacent technologies, demonstrating growth potential along with creative business thinking. An example is X5 Systems, a technology company that introduced breakthrough antenna synthesis software to replace the black art of antenna design. It attracted me as an angel investor because it positioned its antenna synthesis as a key component of mobile systems design. Note that X5 chose to attend the International Microwave Show and not DAC this year, though I am convinced it is an EDA company.

As an EDA lifer, I've witnessed many of the sector's ups and downs, and I can't deny that it is rebounding from a down. Even so, I am optimistic about the future, and I encourage you to be, as well.

Michel Courtoy is a member of the board of directors at the EDA startup Breker Verification Systems.

@dylan - One of the differences between EDA software and open source projects where dozens to thousands can partake (Linux being most famous) is that the latter involves breadth, and little pieces can be partitioned. EDA involves depth at each step, why it goes in tandem with design methodologies. While startups are the source of innovation in EDA, each one is focussed on addressing a particular problem along the way in design. A couple of Oregon-based startups like Lighthouse (which exited in acquisition by Mentor Graphics, and the team thriving as part of the inFact product) and Fish Tail (still private) demonstrate that, as does my firm in Canada, Space Codesign (ESL hw/sw co-design, down to the chip in conjunction with other tools downstream).

I am aware that someone has been doing an open source Verilog simulator but it is hard to find any news about it without digging deep into Google or Bing.

Getting back to Michel's theme on investment, EDA probably joins other Big Science technologies like bio-pharma and medical devices in being focussed and long term projects, versus small, quick and inexpensive mobile or web apps. Even larger software enterprises can start and boot up very quickly - such as Urban Airship (Oregon, again) which started in a garage with two guys in early June, 2009 and at the end of July 2010, secured a Series A VC investment, and now part of the core of the Portland startup galaxy.

@betajet- that's an interesting proposal. My initial response is, could such a model really work with something as enormously complex as EDA software? Secondly, with out the possibility of a big pay day, entrepreneurs would obviously be out of the game. And history has proven that the promise of a big pay day is a pretty serious motivator. What happens to EDA's "big three" under such a model? They are publicly traded companies that aren't going away anytime soon.

In my opinion, what needs to happen is that the semiconductor companies that stand to benefit most from garage innovation in EDA need to fund this activity. Intel and others do this to some extent, but it would be nice to see a concerted effort to get some seed level funding floating out there in an organized way. Perhaps an organization like the GSA or the EDA Consortium could play a central role in this. Obviously you would need people involved who understand the industry and its challenges so that they could choose their bets wisely.

Maybe it's time for EDA to move to free-as-in-freedom software, like operating systems (GNU/Linux) and compilers (GCC), both areas which I don't think can raise VC money any more (if they ever could). With FaiF, everyone shares in the effort to develop software, with each concentrating on the parts in which they have expertise, plus a large testing and debugging community so that "all bugs are shallow".

Semiconductor companies used to do their EDA in-house. The FaiF model allows them to share the common EDA functions, with everybody contributing code and funding to the common core, while each can have in-house extensions for individual competitive advantage as long as they don't distribute it. Some may try to cheat and not contribute back to the common core, but they'll soon find out that trying to maintain their own fork gets old pretty fast.

Salut, Michel! Thanks for giving us a frank update on the present situation. I have met a couple of people from funds who invested in successful EDA startups and yet, they are now reluctant to dip their toes into the water again.

Crowdsourcing seems like a curious option, considering its recent history. Pebble, the smartwatch company, gave contributors (we can't say investors, in this case) a discounted first delivery of their product, i.e., presold products at a discount. The actual transaction was one of the first Pebble watches as a thank you gift, a la PBS and NPR fundraising - I'm not sure if those legal constraints are still in place. But what can an EDA firm offer? Maybe usage time according to the size of donation?

Another wrinkle in the Pebble story is that founder Eric Migikovsky moved his firm and initial staff (maybe a half dozen people at the time) to the US because of the crowdsourcing option. But Kickstarter has announced that it will enter Canada this summer and I have seen one IndieGoGo campaign (fundraising for Notman House, a Montreal startup incubator). I don't know about the crowdsourcing environment in Europe.

Seeking overseas investors sounds promising but it may involve an additional degree of difficulty, based on what Canadian startups (non-EDA) have experienced in attracting US funds (our scene is improving but still not at that level) although that situation has been improving. In fact, many American funds are now seeking investments outside the US and traveling - e.g., regularly visiting Canada, with the aid of a group called The C100 to events like Accelerate (-AB, -TO, -MTL, etc.) and the Montreal International Startup Festival. I have attended some of those events and my firm is, unsurprisingly, the only one in EDA. But it does help us hone our message in explaining what we do! :)

EDA has struggled to attract significant attention from potential backers (with money) for many years. I like the idea of trying to reposition companies into adjacent industries for more visbility. I still think EDA is a tough sell to the VCs.